10/02/2017 As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened

As Goldman Embraces Automation,

Even the Masters of the Universe Are
Threatened
Software that works on Wall Street is changing how business
is done and who profits from it.

by Nanette Byrnes February 7, 2017

Marty Chavez, Goldman Sachs's incoming CFO, has helped the firm become
more automated.

At its height back in 2000, the U.S. cash equities trading desk at Goldman Sachss
New York headquarters employed 600 traders, buying and selling stock on the
orders of the investment banks large clients. Today there are just two equity
traders left.

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10/02/2017 As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened

Automated trading programs have taken over the rest of the work, supported by
200 computer engineers. Marty Chavez, the companys deputy chief financial
officer and former chief information officer, explained all this to attendees at
asymposium on computings impact on economic activity held by Harvards
Institute for Applied Computational Science last month.

The experience of its New York traders is just one early example of a
transformation of Goldman Sachs, and increasingly other Wall Street firms, that
began with the rise in computerized trading, but has accelerated over the past five
years, moving into more fields of finance that humans once dominated. Chavez,
who will become chief financial officer in April, says areas of trading like
currencies and even parts of business lines like investment banking are moving in
the same automated direction that equities have already traveled.

Today, nearly 45 percent of trading is done electronically, according to Coalition, a

U.K. firm that tracks the industry. In addition to back-office clerical workers, on
Wall Street machines are replacing a lot of highly paid people, too.

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Prove a Hard Sell

Average compensation for staff in sales, trading, and research at the 12 largest
global investment banks, of which Goldman is one, is $500,000 in salary and
bonus, according to Coalition. Seventy-five percent of Wall Street compensation
goes to these highly paid front end employees, says Amrit Shahani, head of

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10/02/2017 As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened

research at Coalition.

For the highly paid who remain, there is a growing income spread that mirrors the
broader economy, says Babson College professor Tom Davenport. The pay of
the average managing director at Goldman will probably get even bigger, as there
are fewer lower-level people to share the profits with, he says.

Complex trading algorithms, some with machine-learning capabilities, first replaced

trades where the price of whats being sold was easy to determine on the market,
including the stocks traded by Goldmans old 600.

Now areas of trading like currencies and futures, which are not traded on a stock
exchange like the New York Stock Exchange but rather have prices that fluctuate,
are coming in for more automation as well. To execute these trades, algorithms are
being designed to emulate as closely as possible what a human trader would do,
explains Coalitions Shahani.

Goldman Sachs has already begun to automate currency trading, and has found
consistently that four traders can be replaced by one computer engineer, Chavez
said at the Harvard conference. Some 9,000 people, about one-third of Goldmans
staff, are computer engineers.

Next, Chavez said, will be the automation of investment banking tasks, work that
traditionally has been focused on human skills like salesmanship and building
relationships. Though those rainmakers wont be replaced entirely, Goldman has
already mapped 146 distinct steps taken in any initial public offering of stock, and
many are begging to be automated, he said.

Reducing the number of investment bankers would be a great cost savings for the
firm. Investment bankers working on corporate mergers and acquisitions at large
banks like Goldman make on average $700,000 a year, according to Coalition, and
in a good year they can earn far more.

Chavez himself is an example of the rising role of technology at Goldman Sachs.

Its his expertise in risk that makes him suited to the task of CFO, a role more

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10/02/2017 As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened

typically held by accountants, Chavez told analysts on a recent Goldman Sachs

earnings call.

Everything we do is underpinned by math and a lot of software, he told the

Harvard audience in January.

Goldmans new consumer lending platform, Marcus, aimed at consolidation of

credit card balances, is entirely run by software, with no human intervention,
Chavez said. It was nurtured like a small startup within the firm and launched in
just 12 months, he said. Its a model Goldman is continuing, housing groups in
bubbles, some on the now-empty trading spaces in Goldmans New York
headquarters: Those 600 traders, there is a lot of space where they used to sit,
he said.

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